“When you put all the pieces together, my guess is that the next in line will be Australia”, Econoshock 16/04/13 Beggar thy neighbor in full swing. Well, it took about a month to materialize what common sense was prescribing : The BOJ exporting its problems all around the globe and its main trade partners not being amused.
Last week, the Australian central bank cut its rate to an all time low of 2,75% which barely gives a real interest rate for its citizens (inflation 2,5%). The RBA used the official argument that the inflation scope would further ease and that a further decline in the cash rate was the way forward to secure sustainable economic growth. However, all economist agree that the exchange rate had been the real thorn in their side. For Australia however, relative higher rates than the rest of the world are a necessity in view of the fact that he country hasn’t run a balance of payment surplus since 1975.
And the Japanese debasement exercise ripples through the entire region, next to trade partners Korea and Australia. It took about less than 24 hours for another central bank to react, being the Reserve Bank of New Zealand. This time, the central bank did not use the rate weapon but directly intervened in the market by selling big chunks of Kiwi Dollar. Looking at what happened since October last year when the JPY started its downhill race, it doesn’t require an Einstein brain nor rocket science economics to figure out why this is happening :
And in combination with FX, the Japanese super QE has also effects closer to home. Abenomics and the BoJ have put quantitative easing into higher gear. But it’s not restricted to domestic issues with each and every one scrabling for some scarce yields because the ECB so far has not put its money where its mouth is, unlike the BoE or the FED and the BoJ. But indirectly, 1 and may be an additional effect might materialize : with no more yields present, those who require yield will cave into Irish, Portuguese, Spanish and Italian yields, facilitating the job for the ECB without having to move. Furthermore, the BoJ and/or Japanese institutional financial players will shop around the euro-zone because of either FX arguments and/or coupon arguments. That’s the new normal and let’s just forget about the argument that the world has suddenly become confident about OLOs, French government bonds etc. As a reminder, an update to where our central planners stand and where we might be heading to: